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Socially responsible investing: incorporating personal values with investment decisions

  • Socially responsible investing provides a mechanism for investors to align personal values with investment objectives.
  • In general, ESG investing can be approached in 3 ways: Actively include companies based on ESG factors, exclude companies that violate certain ESG factors, or take a blended approach.


What is socially responsible investing?

At its most basic, socially responsible investing (SRI) provides a mechanism for investors to align personal values with investment objectives by investing in companies with strong environmental, social and corporate governance conduct. This type of investment strategy may help to provide important societal or environmental benefits through companies with a focus on effectively utilizing environmental resources, fostering safer working conditions, or improving corporate governance.

It's important to note that socially responsible investing doesn't mean you have to settle for lower returns while simultaneously supporting causes you care about. After examining performance data for 10,228 open-end mutual funds, researchers found that investing in sustainability has usually met, and sometimes exceeded, the performance of comparable traditional investments on a risk-adjusted basis, across asset classes and over time.*

As you learn more about this topic, keep in mind, the term socially responsible investing is often used interchangeably with "sustainable investing," "responsible investing," and "impact investing."


Understanding environmental, social, and governance (ESG) factors

ESG stands for environmental, social, and governance, which are factors that are generally viewed as assessing how well a company is positioned to address the potential risk and costs associated with these key issues. For example, how is the company managing labor, employee health and safety, or consumer product liability?

The overarching goal of socially responsible investing is to achieve competitive financial returns while also having a positive impact on society, or to avoid investing in companies that conflict with your personal values. For example, if you were concerned about sustainable sourcing, you might choose to buy only a certain brand of coffee. To take it one step further, you might choose to invest in the same coffee company. If you were concerned about a company’s negative impact on the environment, you might avoid investing in companies with extremely high carbon emissions.


Factors to consider when pursuing an SRI strategy

SRI managers and the indexes they track typically incorporate the following ESG criteria into their investment selection process:

  • Environmental factors consider how a company performs as a steward of the natural environment (e.g., a company's carbon emissions, air/water pollution, energy efficiency, raw material sourcing, and other issues related to environmental practices).
  • Social factors consider how a company manages relationships with its employees, suppliers, customers, and the communities in which it operates (e.g., a company's impact on human health, human rights, labor standards, gender diversity, employee engagement, and data protection/privacy).
  • Governance factors can include the quality and reasonableness of a company's leadership, executive pay, audits and internal controls, and shareholder rights (e.g., diversity of the Board of Directors, executive compensation, lobbying and political contributions, and business ethics).

SRI should not be confused with charitable giving or philanthropic efforts to affect social change. For example, if you were concerned about gender equality in the workplace, you could donate to a nonprofit organization that is championing this cause. When it comes to your investment portfolio, you could apply ESG factors to your investment decisions and choose companies that actively promote gender equality.

Choosing socially responsible investments for your portfolio

Once you've made a decision to invest in a vehicle that relies on SRI factors, the next step is to decide where to allocate your money. ESG factors can be applied to individual stocks or if you're seeking professional portfolio management, SRI-focused mutual funds and ETFs may be a good place to start. Currently, there are more than 150 mutual funds and 45 ETFs with an SRI mandate, according to Morningstar.

As with non-SRI funds, some fund managers may take an active approach and seek to outperform an index, while others may take a passive approach and simply try to match a benchmark index. As you research your choices, keep in mind that no two funds or ETFs are managed the same way, so it's important to read each prospectus carefully.


ESG, SRI and Impact Investing: Explaining the Difference…

The value of an investment is no longer just about returns. An increasing share of investors are also calling for their money to make a positive impact on society. Socially Responsible Investing and Impact Investing now accounts for more than $1 out of every $5 under professional management in the US, according to a 2016 survey by the US Forum for Sustainable and Responsible Investments. This amounts to over $8 trillion in assets under management.


What Is ESG?

ESG refers to the environmental, social and governance practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of ESG evaluation remains financial performance.

The table below lists common ESG factors that are considered. Investments with good ESG scores have the potential to drive returns, while those with poor ESG scores may inhibit returns.


Energy consumptionHuman rightsQuality of management
PollutionChild and forced laborBoard independence
Climate changeCommunity engagementConflicts of interest
Waste productionHealth and safetyExecutive compensation
Natural resource preservationStakeholder relationsTransparency & disclosure
Animal welfareEmployee relationsShareholder rights


What Is SRI?

Socially Responsible Investing goes one step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. The underlying motive could be religion, personal values or political beliefs. Unlike ESG analysis, which shapes valuations, SRI uses ESG factors to apply negative or positive screens on the investment universe.

For example, an investor may wish to avoid any mutual fund or exchange-traded fund (ETF) that invests in companies engaged in firearms production because he/she holds anti-conflict beliefs. Alternatively, an investor may opt to allocate a fixed portion of his/her portfolio to companies that contribute to charitable causes.

  • Alcohol, tobacco and other addictive substances
  • Gambling
  • Production of weapons and defense tools
  • Terrorism affiliations
  • Human rights and labor violations
  • Environmental damage

For clients engaged in socially responsible investing, making a profit is still important, but must be balanced against principles. The goal is to generate returns without violating one’s social conscience.


Where does Impact Investing fit in?

In Impact or Thematic Investing, positive outcomes are of the utmost importance - meaning the investments need to have a positive impact in some way. So, the objective of impact investing is to help a business or organization accomplish specific goals that are beneficial to society or the environment. Investing in a non-profit dedicated to the research and development of clean energy, regardless of whether success is guaranteed, is an example.


The sustainability smile…